- Reports Q4, 2020 results on Wednesday, July 22, after the market close
- Revenue Expectation: $36.43 billion
- EPS Expectation: $1.38
When Microsoft (NASDAQ:MSFT) releases its fiscal 2020, fourth quarter earnings on Wednesday, it will have a lot to show for itself regarding how dominant it will be in the post-pandemic economic environment.
When, since March, COVID-19 forced so many office workers to stay at home, demand for Microsoft's cloud infrastructure, communications, CRM, and productivity tools has skyrocketed. As an example, consider Team, Microsoft’s package of workplace collaboration tools.
During the month of May alone, unique visitors to the platform were up 943% versus the same period last year, according to a recent Goldman Sachs report citing Comscore data. Microsoft reported 75 million daily active users of Teams in its last earnings call in April—more than triple the count from just three months prior.
Cloud computing, which had been an earnings driver even before the pandemic, is becoming even stronger as companies invest in IT infrastructure to support employees working remotely. In the last earnings report, MSFT’s revenue from the cloud segment jumped 59%.
Fueled by this business strength, shares of the Redmond, Washington-based software behemoth have had an amazing run so far in 2020. Investors sent the stock soaring after seeing explosive sales growth in the first quarter.
Currently, Microsoft is the world's most highly valued company, with a market cap of $1.6-trillion. Shares have already surged about 31% this year, after the stock had previously delivered returns of about 60% to shareholders in 2019. MSFT closed yesterday at $211.6, just a bit below the all-time high of $216.38 reached on July 9.
Accelerating Digitization
The big question for investors now is how far can this rally go? At almost 33 times forward earnings, Microsoft’s shares are selling at a premium when compared to many top tech stocks. They also carry the highest multiple the stock has commanded in more than 15 years.
In our view, the trends that supported Microsoft shares during the five years have received an additional boost during the pandemic, as the digitization of the world economy has accelerated. That translates into greater demand for the company’s products and services.
The cloud computing segment alone, according to Microsoft executives, is big enough to drive the company’s revenue growth for the next three to four years.
Microsoft's rock-solid dividend and excellent payout record, coupled with the cloud business momentum, add to the stock's appeal. Since 2004, when the tech giant first began paying a dividend, its payout has swelled more than four-fold. Currently, its annual yield is 1.09% with a quarterly payout of $0.51 per share. Even more reassuring, it's payout ratio is a low 34.67%, indicating there's still plenty of runway for future dividend hikes.
Bottom Line
We believe Microsoft’s earnings momentum will continue as it expands its market share into new areas of the digital economy while maintaining its leading position with legacy software products such as Windows and Office.
This durable advantage will help the company achieve sustained, double-digit growth in revenue, earnings per share and free cash flow, making it a reliable tech stock to own over the long term.